2011-0418571R3 Amendment to 6801(d) Plan

Principal Issues: Will the amendment to a 6801(d) plan that permits the value of a participant's DSUs to be paid in common shares result in a disposition of rights under the DSU plan and a resulting income inclusion to a plan participant?

Position: No.

Reasons: The plan amendment will not result in a disposition of a participant's rights under the DSU plan.

Author: XXXXXXXXXX
Section: 6801(d)

XXXXXXXXXX
                                                                                                                                                                2011-041857
                                                                                                                                                                XXXXXXXXXX

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re:  Advance Income Tax Ruling
        XXXXXXXXXX

This letter is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced Corporation, your facsimile sent XXXXXXXXXX, the information provided in your emails sent XXXXXXXXXX and numerous telephone calls (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the above-referenced Corporation, none of the issues involved in the ruling request is:

(i)   in an earlier return of the Corporation or a related person;

(ii)  being considered by a tax services office or tax centre in connection with a previously filed tax return of the Corporation or a related person;

(iii) under objection by the Corporation or a related person;

(iv)  before the courts; nor,

(v)   the subject of a ruling previously considered by the Directorate.

Definitions

a)    “Board” means the board of directors of the Corporation;

b)    "Committee" means the Board or, if the Board so determines, the committee of the Board authorized to administer the Plan which may include any compensation committee of the Board;

c)    “Common Shares” means the common shares of the Corporation;

d)    "Designated Affiliate" means an affiliate, as such term is defined in the Securities Act (XXXXXXXXXX), of the Corporation designated by the Committee for purposes of the Plan from time to time, provided such affiliate is also a related person for purposes of the Income Tax Act;

e)    "DPU” or “Deferred Phantom Unit" means the right to receive a DPU Payment evidenced by way of a book-keeping entry in the books of the Corporation and administered pursuant to the Plan, the value of which, on a particular date, shall be equal to the Market Value at that date;

f)    "DPU Payment" means a cash payment by the Corporation to a Participant equal to the Market Value of a Common Share on the Separation Date;

g)    "Eligible Director" means a person who is a member of the Board or a member of the board of directors of any Designated Affiliate and who, at the relevant time, is not otherwise an employee of the Corporation or of a Designated Affiliate, and such person shall continue to be an Eligible Director for so long as such person continues to be a member of either of such boards of directors and is not otherwise an employee of the Corporation or of a Designated Affiliate;

h)    "Market Value" means the closing price of the Common Shares on XXXXXXXXXX on the day immediately prior to the date as of which Market Value is determined.  If the Common Shares are not trading on XXXXXXXXXX, then the Market Value shall be determined based on the trading price on XXXXXXXXXX or, if the Common Shares are not then trading on XXXXXXXXXX, on such stock exchange or over-the-counter market on which the Common Shares are listed and posted for trading as may be selected for such purpose by the Committee. In the event that the Common Shares are not listed and posted for trading on any stock exchange or over-the-counter market, the Market Value shall be the fair market value of such Common Shares as determined by the Committee in its sole discretion;

i)    XXXXXXXXXX;

j)    "Participant" means each Eligible Director to whom DPUs are issued;

k)    “Plan” means the Corporation’s Deferred Phantom Unit Plan dated XXXXXXXXXX;

l)    "Separation Date" in respect of a Participant whose benefit under the Plan is subject to Canadian federal income tax means the date on which all of the following applicable conditions are satisfied: (1) the Participant is not a member of the Board or of the board of a Designated Affiliate; and (2) the Participant is not an officer or employee of the Corporation or any Designated Affiliate; and 

m)    XXXXXXXXXX.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

Facts

1.    The Corporation is incorporated under the laws of XXXXXXXXXX. The Corporation is not a resident of Canada for purposes of the Act and does not carry on business in Canada within the meaning of the Act.

2.    The Corporation and its affiliates are primarily engaged in the activity of XXXXXXXXXX. All of the Corporation’s XXXXXXXXXX properties are located in XXXXXXXXXX. The Corporation’s registered office is located at XXXXXXXXXX.

3.    The Plan was established on XXXXXXXXXX for Eligible Directors.

4.    Certain of the Participants are residents of Canada for purposes of the Act.

5.    The Plan is administered by the Committee, which has authority to grant awards of DPUs and to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as the Committee may deem necessary in order to comply with the requirements of the Plan.

6.    The Committee may from time to time amend, modify and change the provisions of the Plan, provided that any amendment, modification or change to the provisions of the Plan which would:

a)    materially increase the benefits under the Plan;

b)    materially modify the requirements as to eligibility for participation in the Plan; or

c)    terminate the Plan;

shall only be effective upon such amendment, modification or change being approved by the Board, and, if required, by XXXXXXXXXX and any other regulatory authorities having jurisdiction over the Corporation and provided all amendments to the Plan shall be effective only if the Plan satisfies, at all times, the requirements of paragraph 6801(d) of the Income Tax Regulations (the “Regulations”) or any successor to such provision.

7.    The principal features of the Plan are as follows: 

a)    Each Eligible Director is entitled to be granted DPUs as part of such Eligible Director’s total compensation as determined by the Committee.

b)    In the event that a dividend (other than a stock dividend) is declared and paid by the Corporation on Common Shares, a Participant is credited with additional DPUs.  The number of such additional DPUs is calculated by dividing the total amount of the dividend that would have been paid to the Participant if the DPUs in the Participant's account on the dividend record date had been outstanding Common Shares (and the Participant held no other Common Shares), by the closing price of a Common Share on XXXXXXXXXX on the date on which the dividends were paid on the Common Shares.

c)    Each DPU held by a Participant who ceases to be an Eligible Director shall be redeemed by the Corporation on the relevant Separation Date for a DPU Payment, less applicable statutory source deductions. The DPU Payment is to be made to the Participant on such date as the Corporation determines not later than XXXXXXXXXX days after the Separation Date without any further action on the part of the holder of the DPUs.

d)    The Corporation or any Designated Affiliate may take such steps as are considered necessary or appropriate for the withholding of any taxes or other amounts which the Corporation or any Designated Affiliate is required by any law or regulation of any governmental authority whatsoever to withhold.

e)    No amount is to be paid to, or in respect of, an Eligible Director under the Plan or pursuant to any other arrangement, and no additional DPUs will be granted to an Eligible Director, to compensate for a downward fluctuation in the price of the Common Shares, nor is any other form of benefit conferred upon, or in respect of, an Eligible Director for such purpose.

f)    All DPU Payments to be made constitute unfunded obligations of the Corporation payable solely from its general assets and subject to the claims of its creditors.  The Corporation has not established any trust or separate fund to provide for the payment of benefits under the Plan.

g)    DPUs have been granted to approximately XXXXXXXXXX Participants, who in the aggregate hold approximately XXXXXXXXXX DPUs.

8.    The Plan has never been ruled on by the Income Tax Rulings Directorate.  However, we understand that, to the best of your knowledge and the knowledge of the Corporation, the Plan has at all times from the time it was established to the time immediately before the time it will be amended in the manner described below, satisfied the conditions in paragraph 6801(d) of the Regulations. 

Proposed Amendment

9.    The Corporation proposes to amend the Plan as follows:

a)    to provide that a DPU Payment can be made to a Participant by either; (i) the issuance of one Common Share from the treasury of the Corporation for each whole DPU, with the value of any fractional DPUs to be paid in cash, or (ii) a cash payment by the Corporation to a Participant equal to the DPU Payment, at the discretion of the Committee;

b)    to limit the number of Common Shares available for issuance pursuant to the Plan; and

c)    to provide for additional mechanisms to withhold taxes in the event a DPU Payment is made by the issuance of Common Shares from the treasury of the Corporation.

Purpose of the Proposed Amendment

10.   For accounting purposes, the Corporation’s obligations under the Plan are classified as liabilities. This requires that the Corporation mark-to-market its liability on the preparation of each balance sheet, to reflect any additional expense associated with an increase in the trading price of the Common Shares and any reduction in such expense associated with a decrease in the trading price of the Common Shares. This results in unwarranted volatility in the earnings reported by the Corporation each fiscal quarter. The proposed amendment described in 9a) above is intended to remove this volatility, as well as provide the Corporation with additional flexibility in its use of cash.

11.   The proposed amendment described in 9b) above is intended to address securities law issues.

12.   The proposed amendment described in 9c) above is intended to permit compliance with withholding and remittance requirements under the Act that were enacted subsequent to the establishment of the Plan.

Ruling

Provided the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed amendment and purpose of the proposed amendment, and provided that the proposed amendment is implemented as described above, we rule as follows:

A.    The implementation of the proposed amendment described in 9a) above, in and of itself, will not result in a disposition by a Participant of rights under the Plan and no amount will be included in the income of a Participant under sections 5 or 6 of the Act solely as a result of the implementation of the proposed amendment.

The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the Canada Revenue Agency provided that the proposed amendment is implemented by XXXXXXXXXX.

Comments

The ruling given herein is based solely on the facts and proposed amendment described above.  The documentation submitted with your request does not form part of the facts and proposed amendment and any references to the documentation are provided solely for the convenience of the reader.

Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination concerning:

(a)   whether the Plan in its entirety meets the conditions of paragraph 6801(d) of the Regulations; or
(b)   the fair market value of any property referred to in this letter.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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